Cash Flow for a Small Business — How to Never Run Out of Money
An illustrative but very typical scenario: a food delivery startup goes bankrupt while its annual accounts show a profit. Not losses — profit. The accounting profit is solid; the cash in the bank isn't. A client pays late, a supplier demands prepayment, and the company can't make payroll. No law is broken — nobody is simply watching cash flow.
This scenario repeats every year in small companies. Profit grows, but cash runs short. The owner doesn't understand — "how can this be, when we have so much work?" The answer lies in cash flow management — a skill Latvian accounting software doesn't teach, but one that determines whether a company survives.
Key takeaways
Profit and the cash balance in the bank are two different things — accounting runs on the accrual principle, while cash in the bank reflects actual payments
A 13-week cash flow forecast is a practical minimum for operational management in any small business
In Latvia, the statutory late payment interest rate for commercial transactions is 8 percentage points above the ECB's main refinancing operations rate (Civillikums, Article 1765) — that's considerably more than the commonly repeated myth of 6%
A cash reserve covering 3–6 months of expenses is international financial management best practice, not a requirement set out in Latvian law
A credit line is a tool for bridging short-term gaps, not for financing losses — the actual rate depends heavily on collateral and the lender
Why profit isn't cash — the cash flow paradox
Accounting runs on the accrual principle: revenue is recognized when an invoice is issued, not when the cash lands in the account. Expenses are recognized when a supplier's invoice is received, not when it's paid. Profit is the difference between these two figures — a theoretical number that doesn't have to match the cash balance in your account.
A simple example: in January, you issue a client an invoice for €15,000 with a 45-day payment term. That same month you have to pay suppliers €7,000, wages €4,000, and VAT €3,000. On paper, January looks great — revenue €15,000, expenses €11,000 (VAT is not an expense — it is tax owed to the state), profit €4,000. In mid-February, your bank account shows minus €14,000, because the client hasn't paid yet, but the bills are due now.
This is called a cash flow gap — the period during which you've paid for costs but haven't yet received payment from the client. The gap can last 30, 60, or even 90 days. And if it's bigger than your available cash reserve, the company can run into solvency trouble — even if the profit statement says otherwise.
The 13-week cash flow forecast — how to build one
Banks and investors ask for 12-month forecasts, but operational management needs a shorter, more precise tool. A 13-week (one-quarter) cash flow forecast is a practical minimum for any small business.
Why 13, not 12 weeks? The thirteenth week gives overlap into the next month and helps you spot problems that can arise at quarter-end, when several payments pile up at once.
Building the forecast, step by step:
Starting balance. Record today's actual cash balance in the account. Real, not hoped-for.
Cash inflows. List all expected income by week:
Client payments based on invoice due dates
Prepayments from new orders
VAT refunds from VID
Any other income
Assign a realistic date to each inflow — not an optimistic one. If a client typically pays 10 days late, record the payment 10 days late. The forecast should reflect reality, not wishes.
Cash outflows. List all planned payments:
Supplier invoices with their due dates
Wages (gross + employer social contributions) — estimate with the salary calculator
Tax payments (VAT by the 20th, payroll taxes by the 23rd)
Rent, utilities, subscriptions
Loan principal and interest payments
Net cash flow. Subtract outflows from inflows. You get each week's net result — positive or negative.
Ending balance. Add the starting balance to each week's net cash flow. If the ending balance turns negative in any week, you've identified a problem — and you have time to act before it becomes a crisis.
Invoice payment terms — what to set and how to get paid
One of the most effective cash flow management levers is the invoice payment term. The longer the term, the longer your money sits with the client instead of in your account.
Standard terms and what they mean
7 days — an aggressive term, suited to small clients or low-value services. Large clients often can't meet such a short term because of their internal processes.
14–21 days — a balanced term for most B2B transactions. Gives the client enough time to process payment, without letting your cash "freeze" for months.
30 days — the traditional standard. If you work with large corporations, negotiating a shorter term is nearly impossible.
45–60 days — common in export deals and large projects. The cash flow gap here is at its widest, and you need to plan accordingly.
How to get invoices paid on time
Send the invoice immediately. Delaying invoice issuance is a common mistake — every day an invoice sits in your outbox isn't counted by the client as their delay.
State the payment term and bank details on the invoice. Sounds obvious, but a surprising number of invoices go out without a clear due date.
Automatic reminders. Most accounting software lets you set automatic reminders 3 and 7 days before the due date, and immediately after it passes.
Consider an early-payment discount. This is a common international technique, not a mandatory Latvian standard — for example, a 2% discount if the invoice is paid within 7 days instead of 30. Mathematically, 2% for paying 23 days earlier works out to roughly 32% a year (2/98 × 365/23) — that is more expensive than an ordinary credit line, so the discount only pays off if it genuinely speeds up client payment and you need the cash badly.
Managing late payments — how to recover money without losing the client
Late payments are inevitable — there's no publicly available, verified statistic on what share of B2B invoices in Latvia are paid after their due date, so we deliberately avoid citing a specific percentage. In practice, delays are common rather than exceptional. The problem isn't the late payment itself, but how you respond to it.
An effective escalation sequence
1–7 days overdue: a polite email reminder. "Did the invoice get lost? Would you like us to resend it?" An approach that assumes an administrative mistake, not bad faith, preserves the relationship.
7–14 days: a phone call. An email can be ignored; a call is harder to ignore. Ask whether there's a problem with the invoice you can help resolve.
14–30 days: a formal reminder warning about late payment interest (see below for the statutory rate in commercial transactions).
30+ days: a final warning before debt collection. State clearly that after a set date, the matter will be handed to collections.
What the statutory late payment interest rate actually is
It's worth separating two concepts that are easy to confuse:
VID's late payment surcharge — 0.05% per day on unpaid tax debt. This applies ONLY to tax debts owed to the state, not to transactions between businesses.
Statutory late payment interest in commercial transactions (delivery of goods, purchase, or provision of services between businesses) — under Civillikums, Article 1765, this rate is 8 percentage points above the European Central Bank's main refinancing operations rate, as it stood at the last ECB operation before the first day of the relevant half-year. That's considerably more than the general 6% Civillikums rate that applies to ordinary, non-commercial debts. With the ECB main refinancing rate at 2.40% (in effect since 17 June 2026, so for the second half of 2026), that works out to 10.4% per year for commercial transactions — not 6%, as is sometimes mistakenly assumed.
Source: Civillikums, Article 1765, second and third parts; Bank of Latvia — EURIBOR and €STR indices
Unless your contract states otherwise, this statutory rate applies automatically — and it's your leverage for prompt payment.
When to bring in professionals
If an invoice remains unpaid for 60+ days and the client isn't responding to reminders, it's time to consider a debt collection agency or legal action. But weigh the costs — for small invoices (under €500), collection costs can exceed the amount recovered.
Building a cash reserve — how much is enough
Financial advisors recommend keeping a cash reserve covering 3 to 6 months of operating expenses. This is an international financial management guideline, not a requirement set out in Latvian law — but it's a widely tested and well-founded one. For a small business with €8,000 in monthly expenses, the safety reserve should be €24,000 to €48,000. That sounds like a lot, but it doesn't need to be built in one month.
Building the reserve gradually:
Set aside 5–10% of revenue each month into a separate account — untouchable.
Use seasonal surpluses. If revenue is significantly higher in July–August, route that surplus into the reserve.
Don't count the cash set aside for VAT as a reserve — it belongs to the state, not to you.
Seasonal business — planning for low-revenue months
Restaurants in Jūrmala in winter, accounting firms in summer, retail after Christmas — seasonality is a reality for many small Latvian businesses. Planning here is critical.
Calculate your minimum monthly expenses. Wages, rent, taxes, utilities — everything due regardless of revenue.
Identify the low months, where revenue falls below minimum expenses.
Calculate the total funding gap for those months. For example, if January, February, and March each run €3,000 short of expenses, the total gap is €9,000.
Build a reserve during the high months to cover that gap. If June–August each bring a €2,000 surplus, you'll accumulate €12,000 over six months — more than enough for the winter period.
When to use a credit line instead of waiting on an invoice
A credit line is a tool, not a life preserver. It's used to bridge short-term cash flow gaps, not to cover losses.
When a credit line makes sense:
You have a signed contract with a client, the invoice is already issued, but the payment term is 45–60 days.
You have a fast-growing company where working capital is tied up in receivables, but order volume keeps rising.
A seasonal shortfall you plan to cover from next quarter's revenue.
When a credit line is not the answer:
To cover losses. If expenses consistently exceed revenue, a credit line just postpones the inevitable.
To finance long-term assets. Use a term loan, not a credit line, for equipment and machinery.
The actual interest rate is highly individual and changes over time — it depends on collateral (real estate or a receivables pledge usually gets a lower rate), the lender, the company's credit history, and whether the rate is fixed or tied to EURIBOR. Unsecured facilities are typically priced noticeably higher than secured ones. It's always worth comparing actual offers across several banks, since the difference can be several percentage points.
Cash flow management isn't a one-time task — it's a weekly habit. A 13-week forecast, strict invoicing discipline, and an adequate reserve are the three pillars that protect your business from its most common cause of death. Our team can help both with preparing forecasts and with receivables tracking and reminder automation. Get in touch, or see our accounting services.
Frequently Asked Questions
Why can a profitable company have no cash in the bank?
Because accounting profit is based on the accrual principle — revenue is recognized when the invoice is issued, not when the cash is received. If clients pay late while suppliers, wages, and taxes need to be paid now, a cash flow gap opens up that can coexist with a healthy profit figure.
Why exactly 13 weeks, not 12?
The thirteenth week gives overlap into the start of the next month and helps reveal problems that arise at quarter-end, when several payments stack up at once.
What's the statutory late payment interest rate if a client doesn't pay an invoice?
For commercial transactions between businesses, it's 8 percentage points above the ECB's main refinancing operations rate (Civillikums, Article 1765) — 10.4% per year in the second half of 2026 (ECB rate 2.40%). This differs from VID's late payment surcharge (0.05% per day), which applies only to tax debts.
Is a 3–6 month cash reserve a legal requirement in Latvia?
No. It's a widely accepted international financial management guideline recommended by advisors and investors, not an obligation set out in Latvian law.
When should I use a credit line, and when is it a dangerous solution?
A credit line makes sense for covering a short-term cash flow gap — for example, when an invoice is already issued but the payment term is 45–60 days. It isn't a solution when expenses consistently exceed revenue — in that case, a credit line only delays the problem rather than solving it.
How do I get clients to pay on time?
Send the invoice immediately after the transaction, state a clear payment term and bank details, set up automatic reminders before and after the due date, and escalate gradually — from a polite reminder to a formal warning about late payment interest.
See also: common accounting mistakes in startups and VID deadlines and penalties.
Sources
Civillikums, Article 1765, second and third parts (statutory late payment interest)
Last updated: September 2026. Information based on generally accepted financial management principles, the Civillikums, and Latvian banking practice.
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